1. Insights of Ratio Analysis
AISHVARYA DADHEECH

2. RELATIONSHIP BETWEEN PROFIT AND
LOSS ACCOUNT AND BALANCE SHEET.
 PROFIT AND LOSS  BALANCE SHEET
ACCOUNT
 PBIT  TOTAL ASSETS
 PBT  CAPITAL EMPLOYED
 PAT  NET WORTH

3. PROFIT AND LOSS ACCOUNT.
 Sales 1120
 Operating cost 1008
 ___________________________________
 PBIT 112
 LESS INTEREST 20
 PBT 92
 LESS TAX 32
 PAT 60
 LESS DIVIDENDS 24
 RETAINED EARNING 36

4. BALANCE SHEET
AMOUNT AMOUNT
LIABILITIES ASSETS
OWNER FUNDS 360 FIXED ASSESTS 400
LONG TERM LIABILTIES 200 INVESTMENTS 80
CURRENT LIABILITIES 240 CURRENT ASSESTS 320
800 800

5. Corporate valuation
 Market capitalization
 Share values , nominal, book, market
 Earning per share
 Dividend per share
 Dividend cover and the pay out ratio
 Earning yield
 Dividend yield
 PE ratio
 Market to book ratio
 Cash earning per share
 CEPS = PAT – Preferred dividend + non-cash charges / no. of equity shares o/s

6. P E ratio ( Earning Multiple)
 Red flag to measure how expensive or cheap
 The lower the P/E, the less you have to pay for the
stock, relative to what you can expect to earn from it.
The higher the P/E the more over-valued the stock is.
Example.
Changes in the market price and EPS.
Trailing and projected P E Ratio
N/A 0-13 14-20 21-28 28 + disparate interpretation.
Averages and Market P E Ratio.

7. RETURN ON INVESTMENTS
TWO MEASURES TO COMPUTE
1. RETURN ON TOTAL ASSETS
2. RETURN ON EQUITY

8. RETURN ON TOTAL ASSETS
PROFIT BEFORE INTEREST AND TAX
_________________________________
TOTAL ASSETS
HERE , 112 / 800 = 14 %
RETURN ON NET ASSETS
=PAT/ FIXED ASSETS + WORKING CAPITAL

9. COMPUTATION OF RETURN ON
TOTAL ASSETS
 PBIT/ TA = PBIT/ SALES * SALES/ TA
 ROTA = PROFIT * ASSETS
MARGIN TURNOVER
ROTA = 112/ 112O * 1120/ 800
= 10 * 1.4
= 14 %
DUAL ROLE

10. MARGIN ON SALES DRIVERS
 SALES 1120
OPERATING COSTS
MATERIALS 426
LABOR 291
FACTORY OVERHEADS 168
ADMIN/ SELLING ,ETC 123
TOTAL OPERATING COST 1008
__________________________________
MATERIALS COST % 426/1120 = 38%
LABOUR COST % 291/1120 = 26%
FACTORY OVERHEADS COST % 168/1120 = 15%
ADMIN SELLING COST % 123/1120 = 11%
Total 90%

11. SALES / TOTAL ASSETS DRIVERS
 SALES / FIXED ASSETS
 1120/ 440 = 2.5 TIMES
 SALES( cogs) / INVENTORIES
 1120 / 128 = 8.7 TIMES
 SALES / ACCOUNT
RECEIVABLES
 1120 / 160= 7.0 TIMES
 Purchases/ account payables
 OTHER WAY
AROUND…………….!
 INVENTORY DAYS.
 DEBTOR DAYS.

12. RETURN ON EQUITY
 PAT / OWNER FUNDS
 60 / 360
 16.6 %
 Preference dividend

13. RETURN ON CAPITAL EMPLOYED
 ROCE= PBIT / CAPITAL EMPLOYED.
 Return on Capital Employed ratio measures
the efficiency of the business in using the
capital invested in it to make a profit.
Therefore, the higher the percentage the
more efficient the company is

14. Du pont trend
 ROE = NI / TE
 Multiply by 1 and then rearrange
 ROE = (NI / TE) (TA / TA)
 ROE = (NI / TA) (TA / TE) = ROA * EM
 Multiply by 1 again and then rearrange
 ROE = (NI / TA) (TA / TE) (Sales / Sales)
 ROE = (NI / Sales) (Sales / TA) (TA / TE)
 ROE = PM * TAT * EM
 ROE = PM * TAT * EM
 Profit margin is a measure of the firm’s operating efficiency – how
well does it control costs
 Total asset turnover is a measure of the firm’s asset use
efficiency – how well does it manage its assets
 Equity multiplier is a measure of the firm’s financial leverage

15. LIQUIDITY MEASURES
 CURRENT RATIO
CURENT ASSETS / CURRENT LIABILITIES
320 / 240 =1.33
QUICK RATIO
CURRENT ASSETS – INVENTORY
200/ 240 = .833
WORKING CAPITAL / SALES RATIO
CA-CL/ SALES
80/1120 = .071

16. FINANCIAL MEASURES
 DEBT TO EQUITY
RATIO
 Debt over equity and
debt over total funds.
 Interest cover
 PBIT/ INTEREST